From the beginning of mankind (ladies included) the amount of work required to secure the necessities of life (food, clothing, and shelter) takes about three hours a day. This has held true from Stone Age to modern man. Before the modern era, man would hunt for a few days and then cure the meats acquired. Gardening complimented gathering. The time needed to build shelter, hunt, garden, process and cook foods, and produce clothes took about twenty hours a week per adult. Some days and weeks required longer hours of labor, but over a year, the work required to survive averaged about three hours a day. The remaining time was spent with friends and family playing games, talking, sharing and other pleasurable passtimes.

Then we got civilized. Then we decided that anyone that worked less than 10-12 hours a day is lazy. Now we admire those that work 14-18 hour days. All this insanity started around the beginning of the 20th Century. Only the task of nonstop labor was appreciated.

Working longer than 50 hours a week in unhealthy and leads to all kinds of nasty diseases. Lack of sleep has brought humanity some of our greatest disasters. Is it really comforting to know your surgeon hasn't slept in eighteen hours as you go under for bypass surgery? Do you feel safe knowing your airline pilot only slept four of the last 30 hours? Are you a better driver when sleep-deprived and high on coffee?

Where did we go wrong? Can we get sanity back into our lives? I believe we can.

The basic necessities of life took three hours of labor a day on average in the past. Today, with machines and other time saving technologies, we can support our needs on 10-15 hours per week. "Needs" need to be defined to understand how we can live comfortably working only 15 hours a week.

"Needs" include food, clothing, shelter, and in our modern world, transportation. Food costs very little if prepared at home. In 1970, food consumed about 12-15% of our income, depending which study you read. Today we spend 6-7% of our income on food and that includes meals out. Preparing food at home easily reduces the expense to 2-3% of the average household income.

Clothing is also inexpensive unless you need a closet choked full of trendy threads you only wear a few times if at all. Transportation costs will depend on your location. If you live in a large city, public transportation is available and the cheapest route. If you live rural, you will need a car. You do not need a $30,000 gas-guzzler. You need a reliable vehicle that gets you from point A to point B economically.

I saved shelter for last. Housing costs have risen significantly in the last 40 years; some argue even faster than inflation. However, when comparing apples to apples, housing costs are affordable. You see, in 1970, our society (I am talking the United States here) lived in homes of around 1100 square feet. Today we live in homes over 3000 square feet and fewer people live in each home. The price of an 1100 square foot home today is the same as it was in 1970 adjusted for inflation, maybe less than inflation with the housing market problems of the last several years.

Now we come full circle. How can we live a decent life without working ourselves to death? I am not asking anyone to try living on three hours of works a day. You could, but if you want other things, you will work more. The questions is: How much of your life do you want to sell in the form of employment to someone else to get more stuff? Understand there is nothing wrong with wanting and/or having stuff. I am asking you to consider balancing your wants with the selling of your life energy, as Dominguez and Robin call it, and the real pleasures of living your own life your way, with friends and family.

We work 40 years in the workforce because we want to, not because we have to. Most of the stuff we buy ends up in a landfill in less than a year. We work countless hours to satisfy these fleeting desires. If we balanced our real needs with modest desires, we could all easily retire by age 50 or earlier. We choose to work ourselves to death.

Friday, July 23, 2010

Current media outlets are suffering a schizoid embulism when it comes to the economy. Half the commentators say we are in for massive inflation with all the government spending; the other half say we are in for crippling deflation, where prices decline for an extended period of time.

There is a call for a double-dip recession similar to 1980-82. Another group says we will have prolonged subpar growth with a few radicals calling for a rapidly overheating economy in the near future.

Everyone is wrong and I'll tell you why.

This is not 1980. In 1980 the economy suffered from high unemployment, high inflation, and not enough supply. President Reagan gave us "supply-side" economics. The term has been run through the mud over the decades, but Reagan was right. Lower taxes and less regulation were the exact ticket the economy needed to increase production, hire more labor, and reduce inflation. The problems of today are different.

Government spending does not cause inflation, the imbalance of supply and demand does. The opposite imbalance causes deflation.

Prices will remain stable with inflation starting a few years down the road. Not high inflation, some inflation. Demand is present, but fear is high. Banks are not lending to allow pent-up demand to push prices higher. At the same time, additional supply is waiting for work. Idle factories can fill demand when demand is able and willing to purchase. All these factors will keep prices bouncing around breakeven. There will be months of price declines followed by months of price increases. Mixed together, prices will go nowhere for the next several years.

Energy is the exception. If you review the oil bell curve you will notice a disturbing future event rapidly approaching: declining supply. I have no confidence in the American people to conserve oil until it really hurts; like 20% unemployment with $20 a gallon gas. When the world passes the United States as a low-cost, high efficiency producer, then Americans will get serious. That means Americans might as well get used to a declining paycheck and standard of living. And I'm an optimist. But there is hope.

Oil prices will rise as oil production begins to decline and then accelerates even lower. Oil prices will rise, but energy costs will not. At least not as much as oil, and eventually, energy costs will decline. Countries that cling to oil as an energy source will suffer the consequences.

China and Europe have decided on a different course. Wind and solar production soar faster than demand, lowering their need for carbon based fuels. In less than 10 years, China wants 15% of all their energy needs filled by renewable production. Wind and solar will fill nearly all this need. To date, China is ahead of schedule.

The United States has chosen a carbon course. Policy in Washington is for energy independence from domestic natural gas and coal with a little help from solar and wind. China spends double what the U.S. does on renewable energy production each year. This is why in under five years the U.S. gave up its leadership possition in wind and solar to China, where over 50% of worldwide production now resides. Just think all those high paying jobs, and the U.S. exported them to China. Good move.

China understands that wind and solar have long-term benefits that pay back for extended periods of time. Solar panels and solar water heaters continue producing for decades at a very low cost once installed. China, and any nation that invests with the same wisdom, will enjoy an economic advantage that could last generations. China produces over 90% of worldwide production of evacuated tubes used in solar water heaters. Buy China or burn coal.

But all is not bad for the U.S. China will be the world leader and we can follow wherever they lead. China will want to cash in all those U.S. bonds they have been buying. As I write, China has nearly $1 trillion is U.S. Treasury securities. Just think of all the jobs Americans will have filling Chinese orders. We work, they consume, so we can pay our debts. All work and no play folks. American work ethic at its finest.

So you see, there will be no real deflation; there is too much money in the system ready to go to work propping up prices. Inflation has little chance because a large tract of North America will consume less than they produce for 30 years to pay for the sins of the father. No double-dip recession either. China stands ready to put us to work... at a lower pay rate.

China can even help us rewrite our Constitution. They can help us serve their values. Isn't that nice? And if we refuse, they dump $1 trillion of our debt on the market, pushing up our interest rates to 30%+ and we become a third-world nation.

Ahhhhhh. I'm scaring myself again.

I don't know about you, but I am hungry for Chinese. At least they want to speak English.

Thursday, July 22, 2010

The economic news is grim. Unemployment is near 10% and the meager recovery appears to be stalling. There is good news, however. Auto sales are picking up. Well, certain vehicles are selling well. The big gas-guzzling ones.

Sales of SUVs and trucks are up 24% this year. As long as the vehicle burns a gallon of petroleum every 14 miles or so it is selling well.

It has been 2 years almost to the day since fuel prices rocketed to over $4 a gallon. You would think Americans would have learned a lesson from the warning shot over the bow. But I guess not. Americans want big honking, gas-guzzling vehicles even if it destroys thier finances, puts the economy and their job at risk, or causes another spike in fuel prices.

To understand the depth of stupidity involved here we need to review some facts:

Since 1981, worldwide consumption of petroleum has exceeded discovery of new reserves every year. Think about this sobering fact for a moment. If it doesn't run a shiver down your spine you have other issues to address.

In 2008, worldwide consumption of petroleum was 31 billion barrels; new reserves discovered were 9 billion barrels. Do you feel that shiver again?

Oil production peaked in 2005.

To get the oil that remains requires very deep water drilling. How is that working out in the Gulf of Mexico?

Oil prices are double from a decade ago while we are mired in a deep worldwide recession. How can oil run upwards of $70 a barrel when demand is so low due to the economy? Could it be...

When the economy improves, and it will improve, demand for oil will climb. Without additional reserves available gas prices could soar higher than ever.

Is it just me or do the above facts, coupled with SUVs, sound like a really stupid idea?

I am making a prediction, so remember, you heard it here first. When the economy really starts growing, gas prices will race past $10 a gallon, and will probably hit $16 - $18 a gallon... before 2015.

Then we head right back into a recession. My only hope is that the people that squandered the resource are the ones that lose their job. Why should the responsible pay for the actions of idiots.

Tuesday, July 6, 2010

I have noticed a form of capitulation in my office over the last few years. Due to low interest rates on savings, businesses and individuals have frequently decided to accept the lowest return possible and in many cases, zero.

Savers should not accept the short-term rates in today’s market. It is possible to double your rate of return without any additional risk.

Individuals and business frequently allow funds to languish in checking, savings, or money markets accounts earning under ½%. Short-term money has a habit of lasting longer than expected. Businesses that keep a cushion of funds available almost always have this cushion in place. Individuals keep an emergency fund at a steady level most of the time.

Other investments offer higher returns with additional risk. Even if you have funds in the stock market, you also have money in the bank or credit union. You can settle for ½% or less on this money or earn up to 3% if managed correctly.

As I write, one-year CDs are paying 1.2% at local credit unions; four-year rates yield 2.6%. Four-year CDs are down from over 3% only a few short weeks ago. Still, 1.2% is better than ½% or nothing and 2.6%, while still a meager return, is better than 1.2%.

Using the above information, money that is saved for 1-year or more should be invested in the highest rate CD possible, regardless of the term. Here is why: If you buy a 4-year CD with a 2.6% yield and decide to cash it in prior to maturity, you will pay a six month interest penalty. Running the math illustrates this principle better:

Example 1. You buy a 4-year CD at 2.6%. One year from now you either need the money or have the opportunity to invest it at a higher rate of return. You cash in the CD and pay a six month penalty. For 1 year you earned 2.6% minus the penalty of 1.3%, leaving you with 1.3%. This beats all one-year CDs; most 2-year CDs, too. If you keep the money in the CD longer due to continued low interest rates you still earn at 2.6% while you wait for higher return opportunities.

Example 2. You buy a 4-year CD at 2.6%. A year from now interest rates climb. The math is the same as the above example. You will earn 1.3% after penalty if you cash in the 4-year CD. You can now invest in the new, higher rate CDs. If interest rates stay low longer, you get the best yield while you wait.

The lesson learned: Do not fear early withdrawal penalties on CDs in low interest rate environments. The lower interest rates are, the cheaper it is to cash in a CD early and reinvest in the higher yielding CDs of the future.

Short-term money you must use in less than a year can still make a little return in a money market or CD. Rates are under ½%, but this is better than nothing. Take the ½ %.

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